It’s not a new revelation that customer loyalty is a table stake for sustainable growth. We all know that loyal customers are more profitable and yield a
higher lifetime value. It’s common sense to invest in understanding what drives loyalty, value and the triggers of repeat purchases.

Yet, most companies don’t understand what it takes to build loyalty. That often results in an investment strategy that works against the very thing they
are trying to achieve – for SaaS/Cloud companies, that is making sure that 90 percent of customers renew. SaaS/Cloud companies routinely over invest in new
customer acquisition at the expense of loyalty.

Why? Because companies do not really understand or accurately measure the real costs of customer retention.

“Working with a large number of SaaS companies, we saw the urgent need for a new set of metrics that reflects the operational realities and demands of a
subscription business,” shared Mulla-Feroze. “We developed the CRC metric to help SaaS companies measure their performance, calibrate their financial
health, and steer their investment decisions. As against traditional financial indicators, the CRC metric combined with CAC goes to the essence of running
a subscription business.”

The CRC metric is surprisingly straightforward and includes all the expenses
a company incurs in retaining and nurturing its customer base. The first step is to calculate the CRC.

The second step is to calculate the average cost of retaining each customer segment.

The third step calculates the CRC Ratio. That answers the question of how much an organization should spend to retain every dollar of revenue from the
customer base, taking into account the costs and revenue associated with professional services.

The power of Totango’s CRC metric lies not just in the simplicity of the
equation, but also in its actionable benchmarking framework that guides how to invest in customer success.

“I’ve spent most of my career as a CFO in recurring revenue businesses. We succeed or fail based on whether we can economically acquire and retain
customers. A lot of great CAC metrics have been developed over the years, but good metrics on the cost of retaining customers have been missing,” shared
Mark Klebanoff, Chief Financial Officer of PayScale, a real-time and market-enabled compensation data company. “I
love the thinking that has gone into the development of the CRC framework. It fills a void in how we measure, evaluate, and benchmark SaaS companies.”

SaaS companies have implemented CAC, customer acquisition costs, metrics and guidelines. Those guidelines recommend a CAC ratio of 1 or less; the reality
is that most SaaS companies actually operate at a CAC ratio 1.5 or higher. Meaning the cost to acquire new customers is 150 to 200 percent of first year
revenue and that translates into significant operating losses.

A better question to ask: “What are the right acquisition and retention investment levels needed to yield a sustainable, profitable and growing business?”

The answer lies in a mindset shift away from optimizing for top-line growth. A balanced investment in both CAC and CRC should be equal to 30 percent of
revenue with a target 20 percent gross margin. The actual split between CAC and CRC is heavily influenced by three factors.

1. Your staffing model

Revenue per Customer Success Manager (CSM) is how most organizations think about staffing. With Jason Limekin’s popular quoted figure of $2M revenue per
CSM, many organizations believe they can optimize CSM revenue by increasing the account-to-CSM ratio. The viability of that depends on the average deal
size and complexity of your business which is comprised of the degree of ‘touch’ your product requires, the maturity of your category, and the size of your organization.

Rules of Thumb: Totango recommends that highly complex and medium- to high-price-point businesses are best served with a low account-to-CSM ratio with
one CSM assigned for every $1M in ARR (30% of ARR). Each CSM, on average, manages between a handful to less than 50 customers. Conversely, low complexity
best practices are one CSM for every $4M in ARR (7.5% of ARR) with each CSM managing between 200 and 400 accounts.

2. Customer success systems and productivity tools

Information, knowledge and value-centered customer engagement are key to customer loyalty. The rise of systems and tools to support CSMs and other
functional teams doesn’t come without a cost which needs to be included in the CRC calculation. Think of these investments as a per-CSM or per-employee
cost. Customer success monitoring systems typically track events or activities and are based on big data and predictive analytics that calculate health
scores and produce early warning alerts of churn and up-/cross-sell opportunities.

Rules of Thumb: Totango found that successful companies spend about one percent of the CSM team cost on customer success productivity tools which works out to be approximately 0.1 to 0.3 percent of revenue. Customer monitoring systems costs on average about 0.5 to 1 percent of revenue.

3. Customer programs

Best practice is to include customer nurturing and retention programs under the scope of the customer success organization. These programs focus on best
practice development and executing campaigns that drive product usage, education and customer engagement.

“I look forward to incorporating CRC principles into how we run our business and guide our investment choices for the future. It brings much-needed focus to the operational levers that drive the success of SaaS,” states
Jeremy King, VP Finance and Operations of
InsightSquared.

Calculating and benchmarking CRC is a big step forward in understanding the real cost of customer loyalty and how to optimize the investment to yield
sustainable growth and profits.

An accomplished and passionate leader, Christine Crandell has over 20 years strategy and marketing experience in enterprise technology. An expert in defining, implementing and sustaining transformative strategy, Christine is a serial CMO and has served as CEO, COO, and board of director advisor to dozens of early and growth stage private and public companies.

5 COMMENTS

From both a customer life cycle and enterprise customer-centricity perspective, it is also important to understand the impact on an organization when a customer is lost and/or the defection rate is high: http://customerthink.com/what_happens_when_companies_lose_customers/ The three financial factors identified in your blog are also about stabilization, a key strategy to build loyalty and minimize defection.

Christine – great article. We use similar models when evaluating an organization’s Cost of Risk. By partitioning General Ledger accounts into Core Cost of Business costs and Cost of Risk Costs, we can help companies discover whether their investments to protect against customer churn are paying off, or whether they are efficient and effective.

The challenge is in how the partitioning is done, and the discussions around this can be contentious. Every company needs sales, customer support and IT, for example. But how much cost can be parsed above the Core Cost of Business? They can (and possibly should), of course, but the discussion remains around how much. Also, what happens when there the model changes. For example, increasing the IT cost prorated into Customer Retention Costs. Companies change these ratios all the time – often for good reason. But it makes historical comparison more difficult.

Finally, there are many assumptions made about the importance of customer retention. But I have seen many businesses grow quite quickly (and profitably) without paying much attention to renewals or follow-on business. Heinous as it might seem superficially, these companies have made a strategic choice to focus business investment on new account capture, trading off investment on support infrastructure. Many large home repair companies operate this way. They recognize that their next order from a customer might be a minimum of five years away. For these companies, that’s long-term when it comes to revenue planning. In these situations, cost of customer retention might be low, but other costs of risk would be much higher.

Christine, this seems helpful for properly staffing customer success management. I wonder if there are other costs that should be considered as a second step from the CRC, for holistic decision-making about acquisition and retention with an eye on bottom line as well as top-line. The costs shown in the CRC equation are specific to marketing/sales/service. It may be that some other parts of the company are creating costs to retain customers, or doing things in a wasteful way that prevents customers from being retained. Have you seen any formulas for that kind of managerial guidance?

Hi Lynn, You raise a really good point. So often we only look at customer retention through the lens of marketing, sales and support. Everyone is involved in retention, not just those teams. I did hear from Totango that someone has taken the CRC concept and further developed it. When I get that information, I’ll forward it to you.

How would you expand / change the equation to take into account the costs bore by other functions within a company?

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